The process by which banks create money is so simple that the mind is repelled.
- John Kenneth Galbraith
Every year at D Acres a theme is chosen to serve as a focal point for our major projects, and, if you've been following any of our recent propaganda, you probably realize that the theme for 2012 is "The Local Economy: Currency in Community." In this blog posting I'd like to say something more about the subtitle, since, as I hope you will soon agree, those three words contain much worth thinking about.
To start out with, the phrase "Currency in Community" intentionally has an air of paradox about it. As the Occupiers of Wall Street and Everywhere are constantly reminding us, the single-minded pursuit of currency erodes community. It does this in a number of ways -- I'll mention only three. First for the sake of maximizing profits businesses routinely outsource jobs from communities that depend on them, to temporary and ever shifting free trade zones around the world, wherever the most easily exploited workers happen to be. The result is race to the bottom in which workers are pitted against one another in their vain struggle to preserve jobs and the communities that depend on them. The pursuit of currency likewise leads to corporations dodging their responsibility for paying the costs of pollution and the other "externalities" their activities impose on communities. Instead of cleaning up the messes they make in their quest for profits corporations destroy the commons -- rivers, clean air, topsoil, etc., on which every community depends. And, finally, and most glaringly perhaps, the pursuit of cash leads to the wholesale destruction of communities by subjecting housing to whatever high risk bets all of the very smart people on Wall Street have dreamed up this week. So banks and mortgage brokers, we have learned recently, made more and more sketchy loans for overpriced houses to people who couldn't afford them, often in fraudulent ways, and then repackaged and sold those loans as if they were risk free investments, all while placing large bets on the failure of those same loans. Lots of cash in the form of bonuses and fees was collected but countless communities were destroyed in the process.
Given all of this it might seem strange that we have chosen "Currency in Community" as the subtitle for our next year's efforts. However, before I say more about this clash between currency and community as currency now operates, I should mention that there are two other meanings of the phrase which are relevant and less fraught with conflict. First, "Currency in Community" is intended to capture the turn to community that is taking place as currency in the usual sense lurches from crisis to crisis leaving us all with less of it to spend. Whether we realize it or not, as times get tough, we all turn to community to provide the network of social supports it has, until quite recently, always provided. So "Currency in Community" points to our focus on community building in a way that puts financial transactions on the back burner and highlights the development of personal relationships based on trust and mutual aid rather than just the calculation of individual advantage. Secondly, since currency in the usual sense of cold hard cash still has an important role to play in our economic interactions with each other, "Currency in Community" is intended to highlight a number of efforts we'll be making at D Acres to reconnect currency with our local community. These efforts will include attempts to connect farmers to more local customers to keep currency within the community as well as a much more ambitious attempt to introduce a community-based alternative currency. I've bitten off a lot here, so it's time to start chewing.
The examples I used above to describe how the pursuit of currency undermines communities bring up an obvious question -- what is it that leads to this result? The usual answer to this question puts the blame on greed -- the greed of the fabled 1% who, for whatever anti-social reasons motivate them, simply cannot ever get enough money. It is not money itself, but the skewed values of those who control so much of it that is source of our current problems with currency. This may be part of the explanation, but I think it misses the fact that there is something about money, or more specifically, the way it is created in our society, that should bear much more of the blame. This may sound strange, talking about the creation of money, since it is commonly assumed that a certain amount of money is just out there in the world to be made or lost by individuals and businesses depending on their abilities, the ways the rule of the game work in their favor or against them and on a certain amount of luck. This assumption, however, turns out to be false, since money is continually being created and destroyed in a process, which as Galbraith points out, is so simple that the mind is repelled. We usually think of money as originating as a way of facilitating trade, as something issued by governments to overcome the awkwardness and inefficiencies involved in more primitive forms of trade like barter. Nothing could be further than the truth. Money is in fact almost never issued by governments. It is instead created every day out of thin air by banks. Banks create money every time they issue a loan, and that money vanishes once again as soon as the loan is repaid. That is not the way we look at money normally, but it is nevertheless true. Banks take in deposits from some customers and loan much more than they have on deposit to other customers who promise to pay these loans back with interest. Everybody knows this -- it is known as the fractional reserve banking system in which banks are allowed to loan out more money than they actually have in their vaults, keeping only a small percentage of their depositors money on reserve in case some of those depositors want it back. Now the vast majority of the money out there in the world today, whether it is the cash in everyone's pockets, the balances in their savings and checking accounts, or the money they collect at work every week, originated as a loan that is on its way to being paid back.
Money in our current economic system is thus issued as credit, it then circulates for a while and finally gets paid back and vanishes once again into the thin air it was created from. There are two important points here that I want to emphasize about this process. First, if all of the loans out there that have been issued were to get paid back at once without any new loans being issued, or what amounts to the same thing, if all of the borrowers out there were to default on their loans at once, the vast majority of money in circulation would vanish and there would be little cash around to facilitate economic activity. This is what happened in the Great Depression and it is threatening to happen again, triggered this time around by the European debt crisis which itself is the latest result of the bursting of the housing bubble. So economic activity in general depends on the circulation of enough money in the system and this depends on sufficient numbers of people, businesses and governments taking out loans and paying them back. The second point that needs to be highlighted here has to do with the interest banks charge for the money they lend into existence. The charging of interest on the loans that create money in the first place means that there can never be enough economic activity taking place -- instead tomorrow needs to have more economic activity producing more things of value than today. The money in circulation in the world economy as a whole thus comes with a bet attached to it -- a bet that there will be more things of value to support more economic activity tomorrow. If things don't turn out this way, loans don't get paid back, credit contracts, money vanishes. When money only exists as a result of having been loaned into existence at interest, the economy as a whole can only ever either grow or collapse, it cannot stay the same size.
This is why governments around the world are so fixated on the idea of economic growth. It is not because growth is always a good thing and pursuing growth is what people all really want. It is because if we don't have growth we have recessions and depressions in which everyone suffers. It is conventional wisdom at this point in time that economic growth is nothing but a good thing, so the fact that our monetary system requires it may not seem like any problem at all. As advocates of global "free-trade" policies like to put it, the rising tide lifts all boats -- more economic activity means more things of more value are out there for more people to get more of. Now not only does this assume that human beings are always better off with more money, more possessions and more shopping, more fundamentally it assumes that the economy can in fact grow forever. Again, conventional wisdom, can't see why not. In theory we can grow the economy forever by finding substitutes for whatever we run out of -- the market price of oil going up will spur the search for alternatives or allow us to extract the more expensive tar sands or shale oil that were unprofitable ten years ago; or it can grow as a result of our inventing new services to be paid for with cash -- professional child care, landscaping, elective cosmetic surgery are only three of the myriad new services that have appeared in my lifetime; or it can grow as new markets are created in or forced upon communities that previously didn't have very developed economies or use very much money -- a pattern which is well documented in all of its brutality in Naomi Klein's book The Shock Doctrine. In practice, however, there may very well be real limits to how large an economy can grow. There is a finite amount of solar energy reaching the planet, a finite amount of fossil fuels, of moving air and flowing water for generating electricity, but without ever increasing energy supplies economic activity cannot continue to expand. This makes sense since doing more things would seem to require using more energy. Likewise, there is a limited amount of arable crop land, a finite number of fish in the oceans, a limited amount of space to put our wastes, a limited area on which to build new houses and a limited amount of material with which to build them. There also may be limits to how much we may want the economy to grow, limits in other words to how many human relationships we want to be brought into the economic sphere -- would you be willing to pay for sexual services from your spouse or charge your own children for the parenting services they utilized in being raised by you?
The point of all of this so far is simple if a little surprising. Economic expansion is a requirement of the current monetary system even though the collective pursuit of ever more money often has negative effects on communities. It is not that there are a few people out there whose individual greed drives the world's economic engines to the frantic pursuit of more. Instead the logic of our economic system has built into it a perpetual demand for more money being brought into the system and so encourages and rewards those who pursue more regardless of the human costs of doing so.
To come back to the practical reality of the present, we seem to be now witnessing the slowing and reversal of the largest credit, monetary and economic expansion in all of human history. This means that, like it or not, we will continue to have less money available to us going forward. As we all find ourselves with less to spend in the formal economy we will all have to return to community. And I think there is plenty of evidence that this is happening right now. Witness the growth of community gardens, couch surfing, clothing swaps, co-housing arrangements, ride sharing, food banks, potlucks, knitting circles, home-schooling networks, not to mention college graduates moving back in with their parents rather than to another part of the country for a job. Not all of this is for the better, of course, but it certainly represents a shift from a world in which each new generation was expected to earn more, buy a bigger house and a fancier car than the previous generation could because each generation was richer in cash than the previous. But many people are also discovering that downsizing (be it voluntary or involuntary), simplifying, slowing down, getting more involved in community affairs are more valuable than always speeding up in the manic pursuit of more and more cash. And this value is something impossible to measure in terms of mere cash. Resilient communities require less currency in circulation than the fragmented non-community of the marketplace and they make our lives far richer.
Of course, cash is not entirely a bad thing, and I am not advocating or celebrating the evaporation of currency since in a world dependent on the money economy the sudden disappearance of currency leads to a great deal of hardship and suffering. This brings me to the final point I'd like to discuss, the possibility that there might be different ways of issuing and using currency that might not force us into the losing game of trying to expand economic activity forever on a finite planet. It just so happens that many people have been experimenting with what can be called community based currencies. Such alternative or complementary currencies are intended to serve some of the essential functions of debt-based currencies while avoiding their dilemma of either growth or collapse.
Since I don't want to tax the reader's attention too much more, and since I'd like to get this out there as soon as I can, I'll save further expansion on this idea for another time. For now I'll just mention that there are many different kinds of alternative currencies, things like time banks, community exchanges, and local currencies issued by towns or cities. What they all have in common are the fact that they are tied more or less closely to a particular place or region and that the amount of money in circulation is not dependent on the whole system forever expanding. Instead it is tied directly to the value of what is being exchanged.
I'll talk more about a particular type of local currency called a "Community Exchange" in a future blog posting. For now imagine a system that works like so: I have something I'd like to sell, but don't have a buyer yet, so I post my item and how much I want for it on a list where the people in my community can see it. If someone is interested they purchase it from me, if not, maybe I lower my price until I attract a buyer, or maybe I am willing to bargain with a potential customer. Where does the money come from to purchase what I am selling? It comes from within the system itself -- if the sale goes through my account is credited, the buyer's account is debited. The credit on my account allows me to purchase something from someone else. The debit on the buyer's account will have to be cleared at some point by that person selling something to someone else. In a sense by making a purchase the buyer is taking out a loan, making a promise to bring something to market later to clear his or her debit. One difference between this system and our currency monetary system is that the "money" it relies on is not issued by banks as loans for interest. Instead it is issued within the system and so the amount of money in circulation is exactly equal to the amount of value of all of the things being exchanged. We "earn" and "spend" this money directly with each other without relying on banks to issue loans first to get the whole game going. The debits that buyers accrue do have to be paid back at some point, but since there is no interest, the system as a whole does not need to expand forever. What, you might be wondering, prevents someone from taking advantage of this system and purchasing things without offering anything for sale? There are numerous ways of accomplishing this, including establishing credit limits and making each individual participant's current balance public knowledge. But ultimately, a system of trading that uses money, our current system as well as any alternative system, relies on trust. Part of the appeal of a locally based community currency is that it is explicitly tied to an existing community, a particular place where people can get to know each other if they do not already know each other and where trust can develop and flourish. Community based currencies, like the one I have been describing are based not on a bet that the future will always be richer in monetary terms but on the hope that the future will consist of richer community ties and that currency will enhance and not undermine community.
That's all for now, Happy New Year!